"Fiat money is backed by men with guns; Bitcoin is not. So why should this thing have any value?"--Uber statist economist Paul Krugman.

Wednesday, January 1, 2014

Gary Chartier explains the difference between markets and capitalism

This piece is critical to an argument we have to have here in Delaware: is there a difference between a "market" and "capitalism"?

Libertarians as well as almost everyone else (Hello, Michael Moore) often conflate the two terms into synonyms, but they aren't. Markets involve the mechanisms of exchange and return; capitalism (to use the definition that Chartier, or Fernand Braudel, or Manuel Da Landa would prefer) is mostly an anti-competitive mechanism by which politically well-connected corporations and individuals use their clout to access public money and distort market processes that would leave us all better off if left alone.

I am not talking about unregulated financial markets here; we are looking more at events like the Chrysler/GM bailouts on a national level, or Fisker, Bluewater, Bloom, Kraft, racinos, and others at the state level.

Now let's parse this in Delaware terms, thinking of two specific cases: Fisker and the casinos.

In the Fisker case, the public rhetoric was that investing in this "green" start-up would result in a public good of several hundred more jobs and the associated economic prosperity for Delaware. In that, of course, our political elites turned out to be sadly mistaken, to the tune of tens of millions of dollars of lost tax money. But the question here today is not whether Fisker was a good investment, but how Fisker convinced the political elites to fund such a shaky enterprise at the beginning.

The answer, I suspect, lies not in the jobs but in the ambitions of Delaware's political elites, and their perceptions that a big ticket investment in Fisker (even if they knew going in it was a gamble) would further their own agendas. Let's see: VP Joe Biden had a vested interest in pursuing his boss's agenda of "green" investments. Governor Jack Markell, we might recall, has nursed national aspirations pretty openly for a long time. The cachet of being involved positively and pro-actively in President Obama's program of investing in "green" companies led more than a few Delaware politicians to support the program without looking at the potential downsides. The best evidence of that is the failure of our state leaders to negotiate any meaningful "clawbacks" for getting at least some of our money back if the deal went South. Most notably, the deal was structured so that it could not go South before the next round of elections.

What about the casinos? Two elements here. Despite knowing that eventually if Delaware cashed in on gambling money that other states would follow, our legislators and political leaders treated casino cash as if it would become a steady fixture in our revenue stream. We now finance our schools based on the steady influx of casino cash.

But the second element is this: having become "essential" to the tax base, casino owners became politically well-connected and had no reason to invest their profits to maintain themselves as competitive in the face of out-of-state competition. Why? Because they knew that the State, now dependent on their revenue, would have to bail them out. And our legislators did last year, and will again this year, rather than face the consequences of their own actions.

No revenue stream lasts consistently in the same form forever. Pay for your emergency services out of cigarette taxes like PA used to do, and--inevitably--there will come a day when people smoke less. Pay for your schools out of gambling receipts, and--inevitably--there will come a day when fewer people come to your State to pull the levers on the slot machines. And when these tax revenues begin to dry up--inevitably--legislators will look to maintain them artificially as long as possible to avoid the political pain of either reducing services or finding a new revenue source.

So last year when the casinos demanded millions in a bail-out, our political elites cast that as a measure to "save jobs," rather than admitting it was a bail-out for the casino corporations.

The reality: casino revenue for Delaware is going to decline. Gaming industry experts can even show us the trend-lines. So it's time to figure out either (or both) what we're going to cut or where the next revenue stream is going to come from.

2 comments:

NCSDad
said...

Capitalism is about putting the decision of where to allocate capital in the hands of those who have a successful history of investing capital efficiently as opposed to putting those decisions in the hands of the government/politicians/public lobby groups. You seem to have missed that difference - but it goes out the window when those who accumulate capital have done so by way of Rent Seeking.

Capitalism traditionally, and as it historically originated, referred to amassing of monetary resources (capital) on a scale larger than necessary to operate within the confines of a specific market or markets. The practice comes into play in Europe starting in the early 1500s, when you see the first banking cartels begin to treat capital itself as a commodity rather than traditional commodities like wool, cloth, glass, and other tangible products.

Markets pre-existed capital under classical, medieval and mercantile economic systems, and are driven by different but related rules of economics.

In its origins capitalism was inherently anti-competitive. The first capitalists were quite clear that they were amassing capital to manipulate markets rather than to participate in them on a competitive basis.

Over the past century the classical definition of capitalism has been expanded or stretched to conflate markets and capitalism, and to create such memes as you just used "putting the decision of where to allocate capital in the hands of those who have a successful history of investing capital efficiently," which do not satisfactorily explain trans-national capitalism under a fiat monetary system.